Case 4
Compaq in crisis
Eckhard Pfeiffer was named CEO of Compaq
Computer Corporation in 1991. Since 1991, Compaq’s
annual revenues have increased almost ten times (see
Exhibit 1) and its stock price has increased 1 072 per
cent.1 Compaq became the world’s largest PC vendor in
1994 – two years ahead of schedule. In 1998, it was
named Company of the Year by Forbes magazine. ‘As
long as Pfeiffer is at the wheel, Compaq will continue to
execute with relentless efficiency,’ said Fortune
magazine in 1996.2 In 1998, The Economist declaimed,
‘Compaq’s rivals now fall into two categories: those it is
leaving behind and those whose corporate markets it
threatens.’3
On 18 April 1999, Eckhard Pfeiffer was
unceremoniously fired by Compaq’s board of directors.
How did the man who turned Compaq around in 1991
and built it into the premier PC vendor end up in such
a position? What strategic decision during his tenure led
to his downfall? What problems has he bequeathed to
the CEO who follows him?
Company history
Compaq was founded in 1982 by three former Texas
Instruments executives, Rod Canion, Jim Harris and
Bill Murto. Their guiding idea was to build a ‘portable’
version of the IBM PC. They persuaded Benjamin
Rosen of Sevin Rosen Management Company to fund a
prototype, and later the company, and Compaq, was
born. Rod Canion was its first president and Rosen
became chairman of the board.
This case was prepared under the direction of Professor Robert E. Hoskisson.
The case is intended to be used as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative or
strategic situation.
Adrian Elton
Compaq had two major advantages. First, it built
an IBM-compatible machine that could run IBM
software right out of the box. Demand for PCs was so
great that IBM couldn’t keep up, and dealers were
happy to have Compaq fill the gaps.4 Second, Compaq
didn’t develop its own sales force and so its dealers
didn’t have any direct competition from the company.
This was in stark contrast to the other major computer
makers of the time, IBM and Apple.5
Compaq began setting records in its first year of
operation with sales of US$111 million. This was a
record in first-year sales for a new business in any
industry. In 1983, it began to sell in Europe and shipped
its 100 000th PC. In 1985, the company began trading
on the New York Stock Exchange and earned a place on
the Fortune 500 list. No other company has grown so
fast.
In 1986, Compaq became a serious threat to IBM
by introducing a computer that used Intel’s new 386
processor nine months before IBM did. Sales continued
to increase, breaking US$1 billion in 1987. Compaq
introduced the first battery-powered laptop in 1988,
and revenues that year were US$2.1 billion, twice what
they were the previous year. In 1990, international sales
topped US sales for the first time, making Compaq a
truly global corporation. Total sales were US$3.2
billion, second only to IBM. All this in less than a
decade.
In 1991, Compaq experienced its first hard times.
There was a general industry downturn, and Compaq
had the first layoffs in its history, releasing 12 per cent
of its workforce. On 24 October, a day after reporting
Compaq’s first quarterly loss, Rod Canion was
‘unexpectedly removed’6 from his position as CEO, and
Eckhard Pfeiffer succeeded him.

Exhibit 1 | Compaq’s revenue growth, 1983–98 (US$mn)
C-68
35
30
25
20
15
10
0
1983
1984
1985
1986
Sources: Compaq Home Page, Financial Highlights: www.compaq.com/corporate/1998ar; P. Burrows, 1994, ‘Compaq
stretches for the crown’, Business Week, 11 July, p. 140; ‘Compaq reports record 1992 sales’, 1993, Business Wire, 26
January; ‘Compaq’s history’, 1991, The Atlanta Journal and Constitution, p. C3; ‘Compaq Computer financial results’,
1989, Business Wire, 1 February; ‘Compaq Computer financial results’, 1986, Business Wire, 1 February; ‘Compaq
Computer financial results’, 1985, Business Wire, 11 February; Christian Science Monitor, 1984; ‘Compaq wins by
thinking big’, The San Diego Union-Tribune, 19 April, p. D6.
Ben Rosen indicated that Canion’s dismissal was not
a knee-jerk reaction to bad quarterly results. He
indicated that the board had been discussing creating an
‘office of the president’ to be shared by Canion and
Pfeiffer, but Canion was not pleased by the idea. Forced
to choose between them, the board opted in favour of
Pfeiffer, mainly because of his international experience
in a rapidly globalising industry.7
Michael Swavely, former president of Compaq’s
North American operations who retired in July 1991,
commented, ‘Change was overdue at Compaq.’ Past
success had generated a ‘self-satisfied view of the world’
that produced a reluctance to change, a fatal attribute in
any industry, but especially in computer technology.8
The reasons Rosen gave for Compaq’s falling sales and
declining market share were tardiness in lowering prices
and not enough emphasis on its core market, desktop
PCs.9 Rod Canion had believed that Compaq could sell
at a higher price based on its brand reputation for
quality, and the company quickly found that was a
fallacy.10
Compaq under Eckhard Pfeiffer
Eckhard Pfeiffer began his career at Compaq in 1983
when he left Texas Instruments to launch Compaq’s
Case 4 Compaq in crisis
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
European operation. He was very successful, opening
20 subsidiaries and increasing sales in Europe,
accounting for 54 per cent of Compaq’s revenues in
1990.11 Rod Canion brought Pfeiffer to Houston in
January 1991 to be chief operating officer, and he
succeeded Canion as CEO in October of 1991.
The first thing Pfeiffer did as CEO was cut the gross
margins from 35 to 27 per cent12 by slashing prices and
effectively declaring war on the companies who built
clones, which at that time held 60 per cent of the
market.13 He also fired 25 per cent of the workforce and
increased the number of resellers.14 Even amid
restructuring, Compaq still managed to finish the year
with increased revenue of US$3.3 billion, slightly up
from US$3.1 billion the year before. Pfeiffer, with vision
and determination, set a goal: Compaq will be the
world’s biggest PC producer in 1997 – in only six years.
Industry analysts didn’t think he could do it in such a
short time.15
The first Compaq computers were high in
performance and high in price, and they sold well until
competitors introduced lower-priced machines with
fewer extras.16 Compaq regrouped and in 1992
introduced a new low-cost PC called the ProLinea.
There was ‘a lot of doubt’, Pfeiffer recalls. ‘Would we ...
bastardize the Compaq name?’17 Instead, the ProLinea
Case 4 Compaq in crisis
put Compaq back on track for continued growth,
rapidly becoming the company’s best-selling PC.18
Compaq nearly doubled its US market share to 23 per
cent, surpassing both IBM and Apple. It also emerged as
the favoured PC supplier in Europe, holding 10.3 per
cent market share.19 Revenues continued to rise,
reaching US$4.1 billion at the end of the year.20
In August 1993, Compaq took another giant stride
forward and introduced the Presario, another PC
directed towards individual consumers, especially those
with little or no previous computing experience. The
Presario broke all the records at Compaq, selling twice
as fast as the ProLinea in the first 60 days.21 The
Presario quickly became, and has remained, Compaq’s
mainstay, and the company finished the year with
US$7.2 billion in revenues.
In January 1994, the business world was shocked
when Compaq announced that it would no longer
exclusively use Intel’s microprocessor chips in its
computers. In explaining the choice to buy from
Advanced Micro Devices (AMD), Compaq told the
press that AMD was more than just an Intel clone; it
also had products that would potentially fill some holes
where Intel did not compete.22 Compaq also began to
sell the Presario in Japan in 1995, traditionally a tough
market for American companies.
Pfeiffer convened a company meeting in an arena in
Houston in January 1995 where, in front of 16 000
employees and their families, he announced, ‘We are
No. 1! We made it in 1994! We’ve replaced IBM as the
world’s top PC vendor!’23 Compaq had reached a six-
year goal in only two years. Although Compaq products
were not all that original, it had realised this
accomplishment through exceptional execution. When
Pfeiffer took over, he began by cutting prices and costs,
not by looking for brilliant new engineering. He said, ‘A
ground rule is to set very aggressive cost goals to get
very attractive entry-level products.’24 Compaq finished
1994 with US$10.9 billion in sales.
Having conquered the PC market, Compaq shifted
its strategic focus slightly in 1995. It began to add value
to the computers it sold, emphasising built-in
networking and system management features.25 The
company also launched a worldwide service and
support system to assure information technology
workers that Compaq systems could reliably run
business-critical applications and that the company
could deliver the service and support they required. This
brought Compaq one step closer to becoming a
computer company rather than just a PC company.26
Deciding to operate in the service sector as well as the
hardware sector put the company in more direct
competition with industry giants Hewlett-Packard and
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IBM.
Compaq also decided to move into the networking
business and signed a joint venture deal with Cisco
Systems to build low-cost gear to connect servers to
networks. Likewise, it signed a marketing agreement
with Germany’s ITK, which produces modems that link
portable PCs to servers. It also closed a deal with
Thomas-Conrad Co., a manufacturer of local-network
cards for PCs. The final transaction in November 1995
was the acquisition of NetWorth, Inc., a company that
makes high-speed network gear. All of this gave
Compaq the technology to offer a complete networking
package to its customers.27 Revenues continued to rise,
and the company finished the year with US$14.8 billion
in sales.28
In 1996, Compaq landed two big contracts, one
with Smith Barney and the other with General Motors.
The contracts included purchase of both PCs and
servers, a major step forward for enterprise-wide client-
server computing.29 Compaq’s ProLiant server captured
nearly 80 per cent of the Pentium server market, and
Compaq shipped its 1 millionth server in November
1996, the first company in the industry to reach this
milestone.30
However, things were beginning to strain. In March,
Pfeiffer had to warn analysts that Compaq might not
meet its first-quarter earnings estimates, and the stock
plunged. He acted quickly, ordering incentives for
dealers and price cuts to lift demand. Revenues for the
quarter jumped 42 per cent, and the stock recovered.
This should have been cause for celebration, but the cost
to the company of hitting the growth target was a drop
in profit margin to 20 per cent – the lowest it had ever
been. A troubling fact emerged: Compaq had been
running twice as fast just to stay in place. Sales and
revenues had increased, but profits hadn’t moved.
Pfeiffer wanted the company to continue growing at the
rapid rate of the past years and reach US$40 billion in
revenues by the year 2000. Following a meeting with
managers from around the world, a new strategy was
forged: move aggressively into new product areas that
will make Compaq a full-line information-technology
company, capable of competing with IBM and Hewlett-
Packard.31 Also, a new strategic approach was needed
because IBM had reversed the trend and begun to take
PC market share from Compaq.32
In May 1997, Compaq announced another step into
the networking business by acquiring Microcom, Inc., a
company that makes networking gear. The line between
the networking business and the computer business had
become increasingly blurry, as computer companies
 Case 4 Compaq in crisis

rushed to increase sales in the lucrative industry. Also, in At the 1998 PC Expo trade show, Pfeiffer was
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June, Compaq announced that it was expanding by invited to give the keynote address. In his speech, he
purchasing Tandem Computers, another computer discussed the five key areas that Compaq’s strategy was
maker, which helped the company expand its line to focused on and what it was doing to accomplish each:
include more powerful servers and parallel commercial
• Industry standard computing: ‘Anywhere there is
systems.33
standards-based computing, Compaq wants to be the
More symptoms of internal problems cropped up in
driver, whether it’s in your home, your business or
1997, as Pfeiffer had to make an extra effort to soothe
your car.’
its resellers after Compaq officials said they wanted a
• Business critical computing: Compaq will continue to
‘more direct relationship with customers’. Because of
invest in high-performance 64-bit computing with its
the inroads that Dell Computer had made into
Alpha chip.
Compaq’s sales, many resellers interpreted the remark
• Global service and support: Compaq now has more
to mean that Compaq was seriously considering turning
than 25 000 service professionals around the world
to the direct on-line business model practised by Dell.
who can give customers support and availability
Pfeiffer had to summon distributors to the company’s
services, systems integration and operations
Houston headquarters and reassert his commitment to
management. This gives customers a single point of
Compaq’s traditional distribution channels.34
accountability and lowers the cost and risk of
In October 1997, Compaq paid its first dividend
ownership.
and finished the year with sales of US$24.5 billion.35
• Cost-effective solutions for the enterprise: ‘We will
However, its next move surprised the industry; in 1998,
focus on solutions that build on our leadership in
Compaq acquired Digital Equipment Company (DEC)
enterprise platforms, expertise in key markets, service
for US$9.6 billion – the largest computer buyout in
capabilities, and partnerships with industry-leading
history.36 Digital, which was founded in 1957, was one
companies.’
of IBM’s original competitors. It helped to bring
• Customers: Compaq will leverage the account-based
computers out of back offices and into the hands of the
customer relationships nurtured by Digital and
general public, giving birth to the minicomputer market.
Tandem and combine them with Internet-based
When Compaq was formed, Digital was second only to
selling to provide customers with the most flexibility
IBM. However, bad leadership and bad technology
and choice. Compaq wants to be ‘a strategic partner
decisions had made Digital into a second-tier player.37
whose mission is to give you what you need, when
The acquisition of Digital considerably filled out
you need it, and how you want it, at the lowest total
Compaq’s product line. Digital specialised in higher-end
cost’.39
computers: workstations and Internet servers. More
At the end of 1998, Compaq had US$31.2 billion in
important, Digital brought to Compaq an excellent,
sales revenues and, with the acquisition of Digital, was
large service and support organisation used to working
one of the largest computer companies in the world. It
with big companies and provided Compaq with the
had a definite strategy, and although build-to-order
entrance into an upper-scale big business market that it
companies were beginning to take away market share, it
had been trying to achieve for several years.38 Additional
still had commanding market share.
assets were the Alta Vista Web search engine (which was
later sold to KPMG) and the blazingly fast Alpha 64 bit
processor chip. Analysts expected Compaq to bring its The firing
low-cost, no-holds-barred PC economics into the high- On 9 April 1999, Pfeiffer announced to Wall Street that
end computing markets that were dominated by IBM, Compaq would probably not meet earnings
Hewlett-Packard and Sun Microsystems. Such an expectations for the quarter; that they would in fact be
approach could have potentially revolutionised the about half of what analysts predicted. Compaq’s stock
high-end computing business, and would make plummeted on the news.40
Compaq’s regular PC business more competitive with Benjamin Rosen, chairman of Compaq’s board of
Dell and Gateway 2000. Although some commentators directors, called a board meeting without Pfeiffer, and
raised concerns about the difference between the the board voted him out. On 18 April, Pfeiffer handed
corporate cultures at Digital and Compaq, the merger in his resignation to Compaq’s board of directors. Rosen
moved forward and was finalised on 11 June 1998. and two other board members, Frank P. Doyle and
Robert T. Enloe, formed the Office of the Chief
Case 4 Compaq in crisis
Executive to run the company while they searched for
another CEO. This office was not intended to be a
passive caretaker of the company. Rosen said, ‘The
board is committed to move quickly to select the right
Chief Executive Officer to lead the next era of
Compaq’s growth and development. In the interim, we
will move decisively to take those actions that are
indicated.’41
So where did Pfeiffer go wrong? What grave
mistakes did he make that merited his removal as CEO?
When he announced the quarterly results (or lack
thereof), he attempted to blame Compaq’s poor
performance on a generally weak demand in the PC
industry, lower profit margins and competitive pricing.
As with Rod Canion, he was not removed for
simply having a bad quarter. The bad quarterly results
were merely symptomatic of larger internal problems.
Pfeiffer’s complaints about weak demand, lower profit
margins and competitive pricing were valid, but the
other major PC makers (IBM, Dell, Hewlett-Packard
and Gateway) were not struggling in the same way as
Compaq. Even Rosen had said as much when he
commented that Compaq itself was largely at fault for
its disappointing financial performance.42 He also added
that problems at Compaq were more severe than at first
glance, and he wished they’d replaced Pfeiffer a year
earlier.43
To arrive at this point, Pfeiffer had begun to isolate
himself from employees, even some of his own vice
presidents and higher executives. He oversaw the
construction of an executive parking garage at a
company where parking places had never been reserved,
visibly separating himself from the other employees.
Security on the executive floor was repeatedly increased
and access increasingly restricted. Pfeiffer and his inner
circle worked out the acquisition of Digital, and the rest
of the senior executives only found out about it the
night before it was announced to the press. Apparently,
Pfeiffer had become too insular, not open to feedback
and new ideas from those below.44
When he replaced Canion as CEO in 1991, Pfeiffer’s
aggressive initiatives changed Compaq’s fortunes and
turned the company around. But he seemed to have
become less definite about making decisions. ‘He was
paralyzed by the speed with which the market was
changing, and he couldn’t make the difficult decisions,’
says one former executive.45
As a result of his indecision, there was a failure to
execute as effectively as Compaq had in the past.
‘Pfeiffer is not supposed to be the guy who fails on
implementation,’ says Jonathon Eunice, an analyst at
Illuminata Inc. ‘Everyone talks about keeping the CEO
C-71
accountable; almost no one does it. But [Rosen’s] not
afraid to fire his main guy and move on.’ Eunice
continues, ‘The operations have been so sloppy for the
second year in a row that it’s almost staggering how off
those numbers have been.’46 The reason the office is
called ‘Chief Executive Officer’ is because the CEO
should execute strategy. Pfeiffer was no longer following
through, getting things done, delivering on
commitments. Benjamin Rosen told the press, ‘The
change [will not be in] our fundamental strategy – we
think that strategy is sound – but in execution. Our
plans are to speed up decision-making and make the
company more efficient.’47
Over time, Pfeiffer began to focus on being number
one and forgot about understanding the customer.
Long-time chief strategist Robert Stearns, who left
Compaq in June 1998, says, ‘In his quest for bigness, he
lost an understanding of the customer and built what I
call empty market share – large but not profitable.’48
The acquisitions of Tandem Computers and especially
of Digital Equipment were indicative of this flaw.
Against the advice of some of the senior executives,
Pfeiffer and his tiny inner circle negotiated for Digital
and presented it to the rest of the company after it was
already completed. ‘Buying Digital played into
Eckhard’s fantasy, but it’s turning out to be a beast that’s
consuming the company,’ said one former executive.49
Digital had proved to be tougher to integrate than
predicted: the corporate cultures were more
incompatible than first thought, and Compaq seemed to
have lost its way, although it was likely to reach
Pfeiffer’s ambitious goal of US$40 billion in earnings by
2000.
While Pfeiffer bears extensive blame for the
company’s poor performance, he should also be given a
great deal of credit. Since becoming CEO in 1991, he
turned Compaq around more than once and helped it
grow into a tremendous power in the PC industry.
‘Eckhard Pfeiffer oversaw a period of stunning growth
in Compaq’s history,’ said Rosen. ‘All those who
benefited from that growth owe him a debt of
gratitude.’50 (See Exhibit 2 for Compaq’s financial
performance from 1994 to 1998.)
Wanted: CEO for a large Fortune
500 company
The board’s search for a new CEO went on for three
months. Rumours were rampant as many different
people were considered for the job. Finally, on 22 July
 Case 4 Compaq in crisis

Exhibit 2 | Compaq consolidated income statement, 1994–8 (year ended 31 December)

C-72

1998 1997 1996 1995 1994

Revenue
• Products $27 372 24 122 19 611 16 308 12 274
• Services 3 797 462 398 367 331
Total: 31 169 24 684 20 009 16 675 12 605
Cost of sales
• Products $21 383 17 500 14 565 12 026 8 671
• Services 2 597 333 290 265 214
Total: $23 980 17 833 14 855 12 291 8 885
Other total costs 9 851 3 993 3 271 3 058 2 367
Income (loss) before taxes (2 662) 2 758 1 883 1 326 1 353
Income taxes 81 903 565 43 365
Net income (loss) (2 743) 1 855 1 318 893 988
All amounts are in US$mn.

Source: Compaq Home Page, 1998 Annual Report:

www.compaq.com/corporate/1998ar/financials/5yr_summary_nf.html.

1999, Rosen called a press conference and announced
that Michael A. Cappellas, the chief operating officer at
Compaq, had been offered the job and accepted.
Cappellas joined Compaq in August 1998 as the
chief information officer and became the acting chief
operating officer in June 1999. Before coming to
Compaq, he had worked at Schlumberger, an oil service
company, for 15 years as an executive which included
the company’s first corporate director for information
systems. In 1996, he moved to SAP America as the
director of supply chain management, and in 1997 he
joined Oracle Corporation as senior vice president
before moving to Compaq.51
One of the first problems Cappellas faced as CEO
was convincing shareholders and customers that he was
capable of filling the job. Industry analysts were
concerned by the appointment of an ‘insider’ who had
been at the company for less than a year and who did
not have any CEO experience. Many shared concerns
about his ability to lead a large company like Compaq.52
This issue didn’t bother Cappellas, who told the press,
‘Strategy is about solving business problems. I’ve been
in IT for many years, [so] I’m confident that I can do
that.’53
On the other hand, others were glad to see someone
with a great deal of information technology experience
appointed CEO. ‘The companies that put marketing and
sales people in as CEO never had to run a full enterprise
infrastructure, and they have no idea what our [IT]
problems are,’ says Mike May, vice president of IT at
Teknion Furniture Systems, a Compaq customer.54 And
an analyst at J.P. Morgan & Co. comments, ‘He is not
well-known, but in terms of his qualifications, he’s as
credible as any of the other candidates we were hearing
about.’55 Cappellas’s experience in information
technology could prove to be an asset for Compaq.
However, he faces a set of strong rivals.
Competition
Compaq competes with four other major competitors:
Dell, IBM, Hewlett-Packard and Gateway. These
companies will challenge Cappellas’s capabilities in
strategic leadership. (See Exhibit 3 for the PC market
shares of Compaq and its dominant competition.)
Dell Computer
Dell was founded in 1985 by Michael Dell in Round
Rock, Texas, with a unique premise: selling directly to
the customer and bypassing resellers. Because it sells
direct, Dell has greatly reduced inventory cost and
turnover time. (Currently, turnover is every six days.) In
1996, Dell began to sell directly over the Internet, which
now accounts for approximately 50 per cent of orders.
Dell has used the Internet to offer specially catered
customer service to its large corporate customers by
constructing a personal web page for each. Dell has
been increasing its high-profit product line for big
business. Corporate sales account for most of Dell’s
revenue. In October 1999, Dell outsold Compaq for the
first time in the PC market, increasing its market share
to 18.1 per cent while Compaq’s fell to 15.9 per cent.56
Case 4 Compaq in crisis
Exhibit 3 | PC market share (first quarter 1999)
IBM
8%
Other
45%
Compaq
16%
Source: PC Week Online, Archives: www.zdnet.com/pcweek/stories/jumps/0.4270,2263744,00.html.
IBM (International Business Machines)
IBM was incorporated in 1911. It was the first and
biggest computer company, and pioneered the
introduction of the PC in 1981. IBM faltered in the mid-
1980s when confronted with Compaq and other rivals.
In 1996, IBM began to regain market share in the PC
market and came back to be second in the United States,
after Compaq.57 In 1999, it had US$81.7 billion in
revenues.
Despite its turnaround in the PC sector, IBM has
shifted its focus to its more profitable services division
and is marketing itself as an ‘e-business’, emphasising
how it can help other companies get their companies on-
line to take advantage of the Internet. This allows it to
emphasise services such as high-end servers which also
drives its hardware sales into a higher profit margin
than PCs.58 Currently, it holds 7.5 per cent of the PC
market share in the United States.59
Hewlett-Packard
Hewlett-Packard (HP) was founded by two engineers,
Bill Hewlett and Dave Packard, in 1938 in a garage in
Palo Alto, California. HP was incorporated the
following year and has never stopped growing. Hewlett
and Packard developed a remarkable corporate culture
that encouraged communication and innovation, and
their company has performed accordingly. HP began by
building oscillators and evolved with the technology,
building the scientific calculator that made slide rules
obsolete, and eventually computers and other
hardware.60
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HP
8%
Gateway
9%
Dell
14%
HP gradually diversified into many areas, including
communications and medical technology. In 1999, HP
launched a new company, Agilent, consisting of its
industry-leading test-and-measurement products,
semiconductor products and chemical-analysis medical
businesses. HP could now focus on its core business of
computers and hardware, including printers. HP had
computer-related revenue of US$39.5 billion in its 1998
fiscal year61 and had 8 per cent of the PC market.62
Gateway Computers
Gateway Computers was founded in 1985 by Ted Waitt.
Like Dell, Gateway’s business model is based on direct
customised selling. In 1996, it began to sell computers
on the Internet. Gateway has begun experimenting with
various ways to earn more revenues from its customers.
It opened ‘Gateway Country Stores’, bricks-and-mortar
stores that are owned by the company; the stores carry
no inventory but provide customer service and facilitate
shopping for first-time customers by giving them the
opportunity to test machines before buying. Gateway
has also started up its own Internet service provider,
which has taken off this past year, with half a million
subscribers. At 9 per cent,63 Gateway has more US PC
market share than either IBM or HP.
Future challenges
Michael Cappellas has quite a formidable task in front
of him. Although Compaq has many problems, it has
just as many opportunities. The merger with Digital
must be completed and assimilated into Compaq.64

Buying Digital was to help Compaq grow into a full-line
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computer company offering a large range of products
that would be driven by service solutions. Cappellas
said, ‘We underestimated the cultural issues and just the
hard work it takes to integrate two companies like
Compaq and Digital. And that drains a lot of energy in
the field .... The core PC business was coming under
attack, and the market was shifting just as the
integration was draining management attention. So the
timing was really bad.’65
Completing Digital’s integration will allow Compaq
to expand into the profitable services business by
leveraging Digital’s admirable services arm. This will
put it into direct competition with Hewlett-Packard and
IBM. Business users are buying all-in-one packages of
products and services. However, the solutions business
at Compaq is not functioning well, while at the same
time, margins in the PC business are falling.66
To compete with Dell, Compaq must develop a
better on-line strategy.67 PCs depreciate approximately 1
per cent per week, and a company mustn’t continually
be caught with back inventory on its hands. To reduce
the costs of back inventory, it needs to move to a more
direct sales model.68 When IBM tried selling direct, its
dealers complained and IBM backed off; the company
currently doesn’t sell on-line. Compaq may need to find
a happy medium between on-line and retail selling.
In May, a month after Pfeiffer’s departure, Compaq
announced a restructuring of the sales channel, reducing
the number of places that it ships to from 29 to four.
Endnotes
1 ‘Eckhard’s gone but the PC rocks on: Compaq’s CEO blames his ouster on
a savagely competitive industry’, 1999, Fortune, 24 May, p. 153.
2 D. Kirkpatrick, 1996, ‘Fast times at Compaq’, Fortune, 1 April, pp. 121–8.
3 ‘Compaq goes after Big Blue’, 1998, The Economist, 31 January, p. 66.
4 ‘How Compaq’s portable leaped ahead of the pack’, 1983, Business Week,
15 August, p. 89.
5 Ibid.
6 E. Richards, 1991, ‘Compaq ousts president who founded firm’, The
Washington Post, 26 October, p. C1.
7 L. Kehoe, 1991, ‘Compaq founder fired because board “had to make
choice”’, Financial Times, 28 October, p. 19.
8 Ibid.
9 Ibid.
10 ‘And the losers are ...’, 1994, The Economist, 17 September, p. 6.
11 Kirkpatrick, ‘Fast times at Compaq’; H. Preston, 1994, ‘Compaq’s winning
ways’, International Business, September, p. 56.
12 E. Nee, 1998, ‘Company of the year – Compaq Computer Corp.’, Forbes,
12 January, p. 90.
13 ‘Selling computers is easy – the hard bit is making a profit’, The Economist,
1994, p. 6.
14 Nee, ‘Company of the year – Compaq Computer Corp.’.
15 M. Loeb, 1995, ‘Leadership lost – and regained’, Fortune, 17 April, p. 217.
16 J. Jones, 1993, ‘Compaq builds sales, profits with aggressive price policy’,
Investor’s Business Daily, 27 May, p. 32.
17 S. Higgins, 1993, ‘Executive update’, Investor’s Business Daily, 7 June, p. 4.
18 ‘Compaq Presario 425 is fastest-selling new PC in company’s history’, 1993,
Business Wire, 26 October.
19 ‘Compaq’s Pfeiffer sees significant growth opportunities for U.S. computer
Case 4 Compaq in crisis
This new ‘Distributor Alliance Program’ will reduce
shipping and transaction costs.69 It will also reduce
inventories and thus cut the associated costs. All this
will boost the bottom line, as well as open up many
more opportunities and make Compaq a more viable
competitor with Dell.
Cappellas stated, ‘We did not do a good job of
telling our story. We had fragmented marketing
messages. Compaq had stood for the world’s most
powerful personal computing brand. Then we added the
very high-end Tandem side, and then we brought in
Digital. The customer lost track of who we were.’70
Compaq has the opportunity to reinvent itself once
more as a comprehensive computer company that can
offer an enormous services benefit to its customers,
instead of just being the ‘world’s top PC vendor’.71 This
is a chance to realign the company’s focus and become
a computing behemoth like IBM.
In an interview, Cappellas was asked, ‘Who do you
worry about more, Dell or IBM?’ He responded, ‘I
worry about IBM. They have done a very good job of
positioning themselves around e-business. They sell the
entire suite. They have a great solutions mindset. I have
a great respect for them as a competitor.’72 At first
glance, an observer would think that surely Dell should
be Cappellas’s big worry. However, as the quote
indicates, Cappellas may seek to pursue a strategy
similar to IBM’s. Whatever strategic approach is taken,
he has a significant challenge.
20
industry’, 1992, Business Wire, 7 December.
‘Compaq reports record 1992 sales’, 1993, Business Wire, 26 January.
21 Reuters, 1993, ‘Compaq says its new PC set sales record’, The New York
Times, 27 October, p. D3.
22 J. Burgess, 1994, ‘Compaq goes with clone over Intel chip’, The
Washington Post, 27 January, p. D11.
23 Loeb, ‘Leadership lost – and regained’.
24 P. Burrows, 1994, ‘Compaq stretches for the crown’, Business Week, 11
July, p. 140.
25 L. Spiegelman and M. Mehler, 1995, ‘Compaq’s new PCs mark a shift in
strategic focus’, Investor’s Business Daily, 9 March, p. A6.
26 ‘Compaq launches world-class enterprise service and support capability’,
1995, Business Wire, 16 October.
27 G. McWilliams, 1995, ‘Compaq hooks up with a networking wizard’,
Business Week, 20 November, p. 48.
28 Compaq Home Page, 1999, 1995 Annual Report:
www.compaq.com/corporate/1995ar, 17 November.
29 ‘Compaq, Microsoft announce major contracts with EDS to revolutionize
General Motors dealer service’, 1996, Business Wire, 4 June; ‘Compaq,
Microsoft awarded $17 million contract to supply PCs, servers, software to
Smith Barney’, 1996, Business Wire, 17 April.
30 ‘Compaq first company in world to ship one million industry-standard
servers’, 1996, Business Wire, 19 November.
31 G. McWilliams, 1996, ‘Compaq at the “crossroads”’, Business Week, 22
July, p. 70.
32 N. Alster, 1996, ‘IBM’s silver-medal win: Sign of a PC power shift?’,
Investor’s Business Daily, 5 August, p. A6.
33 Compaq Home Page, 1997, Press Release Archives:
www.compaq.com/newsroom/pr/1997/pr230697a, 18 November.
34 R. Britt, 1997, ‘Compaq soothes resellers, but will the détente last?’,
Case 4 Compaq in crisis

Investor’s Business Daily, 3 June, p. A6. new Compaq CEO’, PC Week, 2 August, p. 40; L. Hawkins, 1999, ‘Compaq
35 Compaq Home Page, 1999, 1995 Annual Report: Computer selects company insider as CEO’, Knight-Ridder/Tribune Business

C-75
www.compaq.com/corporate/1995ar, 17 November; D. Silverman, 1997, News, 23 July; R. Taylor, 1999, ‘Compaq promotes Cappellas to top job’,
‘Compaq Computer to pay first dividend’, Investor’s Business Daily, 17 The Financial Times, 23 July, p. 21.
October. 53 Dicarlo, ‘New Compaq, HP CEOs’.
36 D. Abrahms, 1998, ‘Compaq agrees to purchase Digital in largest computer 54 Ibid.
buyout in history’, The Washington Times, 27 January. 55 Dicarlo and Zimmerman, ‘Initial reactions vary on new Compaq CEO’.
37 E. Ramstad and J. Auerbach, 1998, ‘Behind Digital’s downfall: It’s the story 56 Dell Home Page, 1999: www.dell.com; A. Goldstein, 1999, ‘Dell outpaces
of modern computing, and how a mega-giant has stumbled in recent Compaq in U.S. sales of personal computers’, Knight-Ridder/Tribune
years’, The Ottawa Citizen, 28 January, p. C3. Business News, 25 October; ‘Eckhard’s gone but the PC rocks on’.
38 T. Quinlan, 1998, ‘Texas-based Compaq to acquire Digital for $9.6 billion’, 57 N. Alster, 1999, ‘IBM’s silver-medal win: Sign of PC power shift?’, Investor’s
San Jose Mercury News, 27 January; G. McWilliams, 1998, ‘Power play’, Business Daily, 5 August, p. A6.
Business Week, 9 February, p. 90. 58 IBM Home Page, 1998 Annual Report:
39 ‘Compaq president and CEO Pfeiffer outlines vision for “new world of www.ibm.com/annualreport/1998/letter/ibm98arlsen01.
computing”’, 1998, Business Wire, 16 June. 59 PC Week Online, Archives:
40 D. Einstein, 1999, ‘Compaq stock tumbles on profit warning’, The San www.zdnet.com/pcweek/stories/jumps/0,4270,2263744,00.html;
Francisco Chronicle, 13 April, p. C1. ‘Eckhard’s gone but the PC rocks on’.
41 ‘Compaq board of directors forms office of the chief executive under 60 Hewlett-Packard Home Page, History: www.hp.com/abouthp/history.
leadership of chairman Benjamin Rosen; Eckhard Pfeiffer and Earl Mason 61 Hewlett-Packard Home Page, Press Releases:
resign as CEO and CFO’, 1999, Business Wire, 18 April. www.hp.com/pressrel/jul99/28jul99.htm.
42 G. Balfour, 1999, ‘Pfeiffer: How Compaq’s mighty CEO has fallen’, 62 PC Week Online, Archives:
ComputerWorld Canada, 7 May, p. 1. www.zdnet.com/pcweek/stories/jumps/0,4270,2263744,00.html.
43 Company profile, 1999, ‘The lion in winter’, Business Week, 26 July, p. 108; 63 ‘Eckhard’s gone but the PC rocks on’; Gateway Home Page, 1999,
‘“I was an asset ... rather than a meddler”’, Business Week, 26 July, p. 116. History: www.gateway.com/about/info; PC Week Online, Archives:
44 ‘Eckhard’s gone but the PC rocks on’; L. DiCarlo, 1999, ‘Eye of the storm: www.zdnet.com/pcweek/stories/jumps/0,4270,2263744,00.html.
Compaq executive turmoil traced to Pfeiffer’s inner circle’, PC Week, 24 64 S. Gibson, 1999, ‘Compaq, customers need common ground’, Fortune, 10
May, p. 1. May, p. 85.
45 DiCarlo, ‘Eye of the storm’. 65 D. Kirkpatrick, 1999, ‘Superior performance is the key to independence’,
46 Balfour, ‘Pfeiffer: How Compaq’s mighty CEO has fallen’. Fortune, 16 August, p. 126.
47 R. Charan and G. Colvin, 1999, ‘Why CEOs fail’, Fortune, 21 June, p. 69. 66 S. Deck, 1999, ‘Compaq counts its losses’, Computerworld, 28 June, p. 30.
48 ‘Eckhard’s gone but the PC rocks on’. 67 ‘Compaq looks inside for salvation: Can Michael Capellas make the PC
49 DiCarlo, ‘Eye of the storm’.. giant into a Web master?’, 1999, Fortune, 16 August, p. 124.
50 ‘Compaq board of directors forms office of the chief executive’. 68 Ibid.
51 J. Darwin, 1999, ‘Surprising week shakes up Compaq’, Houston Business 69 T. Campbell, 1999, ‘Compaq tries to reboot’, Sales & Marketing
Journal, 30 July, p. 1. Management, July, p. 20.
52 L. Kehoe and R. Taylor, 1999, ‘Compaq faces “Internet speed” change’, The 70 Kirkpatrick, ‘Superior performance is the key to independence’.
Financial Times, 26 July, p. 20; L. DiCarlo, 1999, ‘New Compaq, HP CEOs: 71 Loeb, ‘Leadership lost – and regained’.
A contrast’, PC Week, 26 July, p. 1; Darwin, ‘Surprising week shakes up 72 Kirkpatrick, ‘Superior performance is the key to independence’.
Compaq’; L. DiCarlo and M. R. Zimmerman, 1999, ‘Initial reactions vary on